How Bank of Scotland joined GBP 1bn club

UNTIL last week Scotland's exclusive 'billion pound club' hadonlyone member. But Bank of Scotland has just entered the gilded ranksof Scottish companies making profits of GBP 1bn, hard on the heelsofarch-rival the Royal Bank of Scotland.

Passing that magic milestone gave chief executive Peter Burt arare opportunity to savour the group's success after weeks of mud-slinging over the bank's unpopular tie-up with controversial USpreacher Pat Robertson.

It may niggle that the Royal was first to seize the twin titlesofScotland's most profitable business and the first to break the allimportant GBP 1bn profits mark.But last Wednesday the Bank pushed the goal posts further apartringing up a 30% rise in headline annual pre-tax profits of GBP1.01bn.But before the bank's 20,000-plus staff had a chance to let theirhair down and start spending the 15% bonuses they were given on theback of the boom, City analysts were carping about the figures.The record-breaking results, on closer inspection, were bolsteredby a one-off gain from the GBP 162.1m sale of New Zealand-basedCountrywide Bank to LloydsTSB. Stripping this out, profits totalledGBP 849.8m, more than GBP 100m up on last year but still within Cityexpectations.Analysts may prefer to focus on the pared-down set of figures, butthe accounting methods used to arrive at the GBP 1bn figure arecommon practice and in fact the Royal's own GBP 1bn figure wasboosted by a one-off gain from the sale of its Spanish supermarketoperations.Analysts generally consider the bank to be a well-run outfit,naming Burt as one of the most respected managers in the business.But the bank's shares are not seen as a bargain ."It's a good bank, but it's an expensive bank. It was quite ripefor profit-taking," admitted WestLB Panmure analyst David Poutney.Goldman Sachs was more positive, planning to upgrade its forecastsfor next year.Away from the moral tussle over the bank's deal with Robertsonthere is a growing view that its innovative retail strategyoutshinesits larger UK competitors in tapping new ways to win business.The bank continues to run with some of the lowest costs in thesector. Its cost-to-income ratio, a key measure of operatingefficiency, dropped again last year to 46.3% from 47.3%,outperforming rivals, including the Royal which has a ratio of 52%,Barclays on 66% and NatWest at 67.4%.While the London-based clearing banks struggle with the massiveoverheads of their extensive branch networks the bank isconcentrating on tackling the challenge presented by other new low-cost entrants.The likes of Prudential's Egg and Standard Life Bank have takenbillions of pounds in savings in just a few months and many analystsbelieve that there is now a trend toward telephone and internetbankswhose low cost base enables them to offer high rates of interest.The bank is trying to match them all the way, cutting back officestaff to just two centres in Scotland while planning further jobcutsto create a leaner global operation.Burt's innovative style in finding new business has caught rivalson the hop. So far he has deliberately steered clear of expensiveacquisitions and focused instead on what he calls "ventures".However this could change very soon as the bank prepares for apotential head-on clash with the Royal in a battle to take overBarclays Bank whose future was thrown into doubt with the recentlossof newly-appointed chief executive Michael O'Neill due to ill-healthbefore even starting work.Both Scottish banks are said to be "very keen" to do a deal. Butwith the big deal still just a possibility, the bank is focusing onreaping the gains from its new business channels.The bank has a 45% stake in Sainsbury's Bank which has 900,000customers and has taken GBP 1.7bn in savings.The Pat Robertson tie-up is expected to go ahead in the nextmonth, despite vociferous protests from interest groups as diverseasthe high church and gay rights organisations. Emotion aside, thebusiness logic of tapping into the evangelist's audience of 50million is clear.The bank also confirmed last week that it has struck anotherlucrative tie-up with the Pharmacy Guild of Australia to sellfinancial services through 5,000 pharmacies, as revealed in Scotlandon Sunday five weeks ago.These deals have one thing in common - they tap into someoneelse's customers. Dispensing with massive marketing costs andgaining valuable insider knowledge of a captive market adds millions- one day maybe billions - to the bottom line.But these deals would be dwarfed by a merger with Barclays whichwould create a GBP 40bn plus European banking colossus, making eventhe billion pound club look small beer.